Economists remain unfazed by the slight uptick in this week’s consumer price inflation print, maintaining there is still room for Reserve Bank governor Lesetja Kganyago to hold, or even cut, the repo rate.
Stats SA announced on Wednesday that annual consumer price inflation was 3% in June, up from 2.8% in May, its highest level in four months. The central bank’s monetary policy committee (MPC) is due to meet this week to determine the repo rate, and Kganyago will announce the decision on Thursday afternoon.
Elna Moolman, head of South Africa macroeconomic research at Standard Bank Group, said it was expected that consumer inflation would enter the Reserve Bank’s target range in June, after falling below the 3%-6% target range for three months in a row.
Such low inflation provides considerable support for consumers, given that most wage increases are higher than this low prevailing rate of inflation. It also arguably supports the case for the Reserve Bank to cut interest rates further at the upcoming MPC meeting next week
— Elna Moolman, head of South Africa macroeconomic research at Standard Bank Group,
“Such low inflation provides considerable support for consumers, given that most wage increases are higher than this low prevailing rate of inflation,” she said. “It also arguably supports the case for the Reserve Bank to cut interest rates further at the upcoming MPC meeting next week.”
While she expected inflation to continue “trending higher in the coming months”, she said this trend was expected to be “reasonably benign”.
Kristof Kruger, fixed income trader at Prescient Securities, said the June CPI data surprised to the downside, with headline inflation falling to 2.8% year-on-year compared to the expected 3.1%, and core at 2.9%. These were both marking the lowest prints in the current cycle.
“The market reacted positively. The rand firmed to 17.59 [to the US dollar], bonds rallied — notably the R2053 by four basis points — and the forward rate agreement curve now prices in 25 basis points of easing by year-end. Inflation is now printing below the repo rate, strengthening the case for Sarb policy space.”
He said positioning into this week’s MPC meeting would now “lean incrementally more dovish”, especially if global risk remained constructive.
Andre Cilliers, currency strategist at TreasuryONE, said inflation performing in line with or below forecasts would yield benefits for the rand’s performance against the dollar.
“South African CPI data, forecasted to rise to 3.1% year-on-year from 2.8%, [is] pivotal. A lower-than-expected CPI could push the dollar and rand below R17.52 towards R17.45, while an upside surprise may drive it to R17.65. The US dollar to the rand trading range is projected between R17.40 and R17.80.”
Bank for International Settlements economist Hyun-Song Shin said that because inflationary risks from geopolitical and trade tensions persist, central banks would be probing whether the easing of monetary policy was left too late, though they continued holding the course.
Kganyago told Business Times last week that the price of food, goods and other services could be vulnerable to doubling every 12 years if the inflation rate peaks at the bank’s current upper range of the target band of 6%.
The Reserve Bank is working with the National Treasury and the government technical advisory centre on an inflation targeting framework to investigate the feasibility of a lower and tighter inflation target, as well as its effect on inflation, the currency and price stability.
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